Large financial companies ordinarily tend to have tremendous litigation exposure from both the regulatory agencies providing oversight and from disgruntled consumers who may have grievances. That litigation exposure increased in 2009 when the Securities and Exchange Commission (“SEC”) expanded the investigative power of senior SEC enforcement attorneys by allowing them the discretion to issue subpoenas.[1] Litigation exposure threatened to increase further in July of 2017 when the Consumer Financial Protection Bureau (“CFPB”) issued an arbitration rule, effective 2019, that would have prevented companies from including class action waivers in the arbitration clauses of their customer contracts.[2]

In reaction to perceived overregulation and to “promote economic growth and innovation and protect individual liberty,” the Trump administration has directed efforts to scale back regulation and decrease the operative scope of several administrative agencies.[3] This has led to administrative and legislative bodies reversing policies designed to increase litigation in the financial industry. The SEC has scaled back its investigative arm and its rule making agenda. Furthermore, on November 1st of this year, congressional nullification of the CFPB’s arbitration rule became law.[4] In the wake of these changes, large financial companies will be comparatively insulated from the traditional court system.

Deregulation at the SEC

In Executive Orders 13771 and 13777, the Trump administration directed administrative agencies to decrease cost and reform their agendas.[5] The Office of information and Regulatory Affairs reports “ongoing progress toward the goals of more effective and less burdensome regulation.” [6] Agencies collectively withdrew 469 actions from their rule making agendas for an estimated cost savings of over $22 million dollars.[7] Particularly significant reductions were seen at the SEC. In July 2016, the SEC’s rule making agenda contained 62 items. [8] This past July there was a 46% reduction as the updated agenda contains only 33 items.[9]

The SEC makes rules to implement congressional legislation and brings civil enforcement actions against those who violate securities law. [10] In the wake of the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) obligated the SEC and other regulatory agencies to engage in new rulemaking to “improve accountability and transparency in the financial system.”[11] Implementation of Dodd-Frank actions would likely increase financial litigation as they provided for new claims and penalties under the Truth in Lending Act (“TILA”). [12] The Senior director of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness points out that, “The SEC is in the place now where they’re moving on from mandated Dodd-Frank rulemaking.” [13] Away from the current agenda on to the long-term actions schedule are several key Dodd-Frank actions related to pay-for-play performance, executive clawbacks, universal proxies, and clawbacks of incentive compensation at financial institutions.[14] The prolonged absence of expanded Dodd-Frank rules removes the threat of increased litigation that they posed.

The shift in regulatory agenda is also evident in the words and actions of Trump administration appointees. The SEC’s enforcement actions are “crucial” to the stated goals of safeguarding securities markets against fraud by promoting transparent disclosures.[15] However SEC Commissioner, Michael S. Piwowar, once characterized imprudent SEC investigations as instruments prone to creating the type of “false and misleading information” in the public that may lead to “increased volatility in the markets” and “inefficient distribution of capital.”[16] In a move to protect financial institutions from imprudent investigations that may prejudice public opinion, Piwowar reduced the investigative power of the SEC’s enforcement attorneys.[17] Now only the Director of Enforcement may approve a formal investigative orders and issue subpoenas.[18] By tightening the reigns on senior enforcement attorneys, the SEC Commissioner has in effect protected financial institutions from SEC enforcement actions that do not have supervisory approval.

Congressional Override of the CFPB

Companies can always attempt to mitigate their chances of being sued through careful operations and the implementation of responsive business practices, but because of their effectiveness, arbitration clauses are a particularly popular form of preventing litigation in the financial industry. While proponents note that alternative dispute resolution in the financial industry has the benefit of being cheaper and faster than litigation, the true teeth of these clauses come from class action waivers. Arbitration clauses often contain small claims court exceptions and are infrequently invoked in individual litigation, meaning that they provide increased utility for businesses when they successfully prevent class actions.[19] The CFPB arbitration rule prohibited “the use of a pre-dispute arbitration agreement to prevent a customer from filing or participating in certain class action suits.” [20] In the absence of the CFPB’s arbitration rule, consumers with damages claims will be funneled away from class action, decreasing the litigation exposure of financial institutions.

Dodd-Frank legislation created the CFPB and directed it to provide a report on arbitration agreements to congress. [21] The comprehensive arbitration report was released this March and concluded that consumers rarely give much thought to how they will be able to bring future claims in the event of a dispute and “are generally unaware of whether” they have signed contracts that include arbitration clauses and do not know that such clauses may make class actions an unavailable remedy. [22] This makes consumers particularly vulnerable to financial institutions and dependent on regulatory action to make decisions on the appropriate scope of arbitration clauses. Consumer advocates say that the threat of litigation incentivizes good behavior from financial institutions far more readily than alternative dispute resolution methods.[23] Class action litigation in particular may not lead to large pay outs for individual class members, but may impact financial industries as their settlements often include agreements from companies to “implement new procedures” or refrain from similar conduct. [24]

So, in order to promote this important type of litigation, the CFPB issued its arbitration rule in July. [25] Since its creation, the CFPB has enacted rules like this arbitration rule in the interest of “protecting consumers in the financial marketplace” in areas that other regulatory agencies may have authority.[26] However, disdain for Dodd-Frank era actions has led to a surge in deregulatory sentiment and to the CFPB’s new rule being overruled by Congress.

Former CFPB Director Richard Cordray said that class action waivers are tantamount to “sidestepping the courts” since consumers are far more likely to join class action suits than “to go it alone or give it up.” [27] Therefore, proliferation of these class action waivers in the absence of the CFPB’s rule may leave some consumers deciding not to pursue their claims at all.

Conclusions

In the absence of governmental oversight or pressure from class action litigation, financial companies will be de-incentivized from responding to consumer complaints. Thus, recent regulatory action will make it harder for consumers to depend on governmental protection or self-help remedies when disputes arise with financial institutions. Moving forward, this may reassign responsibility to the individual consumer to exercise vigilance over their relationships with financial institutions.

*Hannah Taylor is a Junior Editor for MJEAL, she can be reached at hannahmt@umich.edu

The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

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Disclaimer

The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

The Michigan Journal of Environmental & Administrative Law (MJEAL) is The University of Michigan Law School's newest legal journal. MJEAL is made possible by a generous grant from the Graham Sustainability Institute at the University of Michigan.

The journal publishes articles, student notes, comments, essays, and online blog posts on all aspects of environmental and administrative law.